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Thu, May 08, 2008 - Page 10 News List

Guangdong planning salary increases, economists warn of inflationary risks

AFP , BEIJING

China’s southern province of Guangdong is the latest area in the nation to unveil plans to raise wages, state media said yesterday, a move economists worry runs counter to efforts to rein in inflation.

Guangdong provincial labour authorities said in a plan for this year that they aimed to establish a regular salary increase system and raise wages of all employees in the region by 12 percent or more this year, the China Youth Daily reported.

Other areas in China have announced similar polices, including the financial hub of Shanghai, where guidelines for salary increases for this year have called on companies to lift employee wages by 5 percent and 16 percent.

This is meant to help households, especially low-income families, cope with the country’s surging inflation, which has fueled government fears of potential social unrest.

China’s consumer price index rose 8 percent in the first quarter of the year. In February, it climbed to 8.7 percent — the highest in nearly 12 years — before easing slightly to 8.3 percent in March.

But analysts have voiced concern that salary hikes risk exacerbating the inflation problem that they are supposed to alleviate.

“Salary rises are certainly contributing to inflation,” said Chen Xingdong (陳興動), an economist with BNP Paribas in Beijing.

If companies are told to pay higher wages, they may have to raise their prices to stay out of the red, the economists said, warning this could be the beginning of a vicious cycle.

“The problem will get worse if salaries and price rises take turns,” said Ma Qing (馬青), a Beijing-based analyst with the think tank CEB Monitor Group.

They argued that it could also add an extra burden on companies that are already under big pressure of soaring upstream raw material prices and might even put them out of business.

“If the requirement goes beyond what companies can afford and therefore forces them to cut jobs or stop production, then the losses may be bigger than the gains,” Shen Minggao (沈明高) of Citigroup said.

The Chinese government has signaled growing concern about the ways in which rising prices might adversely affect the poorest in society.

Since January, it has resorted to freezing price hikes on key consumer items like grain, edible oil, meat, milk and liquefied petroleum gas to keep them affordable for most families.

Wage hikes may be meant to do the same, but economists warned they could actually lead to more social tensions by widening income disparities.

This is because wage hikes by decree are likely to benefit mainly government employees, while blue-collar workers in private companies may get left behind.

“I doubt who will benefit from a policy where the government directs salary increases,” Ma said.

“In the final analysis, I think it will only raise government employees’ wages. This is what happened in 2006 and 2007,” Ma said.

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